Friday, May 26, 2017

6 Random Commercial Real Estate Thoughts on TODAY'S Market

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Today, I thought it would be fun to dissect my current workload and discuss a few random thoughts on commercial real estate that have dominated my psyche for the past few days.

Maybe, in the process of reading this, you, my faithful readers, may learn something and alter your direction to avoid a costly mistake.

Lease rates continue to astonish! Historically, an increase in lease rates trails the increase in sales prices during a market recovery. Our plunge from the peak of 2007 was swift and deep. We lost 40-50% of our values in a period of six months to a year. Many of us wondered if the commercial real estate market would EVER recover. We started to see a real pop in selling prices after the tax law changes of 2012. 2013-2015 were monster years for selling price appreciation. We all knew lease rates would soon follow. But, WOW! If you told me class A industrial lease rates would approach $1.00 per square foot by 2017, I would have questioned your sanity. Surprise. We have not lost our marbles. We are there!

Will these sale prices ever plateau? After the dramatic selling price increases in 2013-2015, many in our industry predicted a leveling in 2016. However, selling prices have pushed past 2007 highs and now are eclipsing 2016. When will the end come? My guess is once money becomes less affordable or we experience a dramatic global black swan event, selling prices will plateau and even soften. Exacerbating the problem, however, is a frighteningly low vacancy of available buildings for sale or lease.

Can you ask too much? I used to believe so. Not anymore. Recently, we performed a broker opinion of value for a fifty year old manufacturing building whose best days were during the Nixon administration. Our estimate was X. The seller insisted upon X plus 50%. We settled on X plus 40%. As we drove away with the signed engagement, I wondered how on earth we would justify the asking price. Twenty inquiries, three tours in three hours, two full price all cash offers with exceptionally quick closes later, I'm a believer. You cannot ask too much.

Demand for old, obsolete buildings. Old, obsolete industrial buildings once were shunned in favor of their newer more glamorous contemporaries. With the shortage of available buildings, these ugly ducklings are becoming white swans. Demand is back and historic prices are being achieved!

Good housekeeping is a must! Make sure your paperwork is in order. Your leases should be up-to-date. All entity tax returns and filing fees should be paid. Sprinkler certifications, and maintenance of the roof and air conditioning needs to be accomplished. If you have added square footage to your building or new offices, make sure your building permits are easily accessible. Please don't wait until you're under contract to sell your building to discover something crucial is missing.

A burning question. How will cities and counties in California handle the execution of proposition 64 which legalized recreational cannabis? Cities and counties have until January 2018 to decide and we will have to wait and see, but many operators are ignoring the illegality of the growing and sale of recreational cannabis. See "demand for old, obsolete buildings".

Tuesday, May 16, 2017

Seller STILL Unrealstic? Try This. TUESDAY Traffic Tips

Last week we discussed UN-REALISTIC sellers and allowing the market to be the bad guy. You've now done that and the seller REMAINS unrealistic. So, what should you do? Really, it boils down to one of a couple of options. I discuss this and much more on this week's VIDEO for commercial real estate professionals.

Seller STILL Unrealistic? Try This. TUESDAY Traffic Tips.

Thursday, May 11, 2017

5 Hidden Land Mines in Commercial Real Estate Deals

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Land mines are generally buried beneath the surface so that the unwary happens upon them and before they can react, BOOM! A significant amount of damage is inflicted upon the unsuspecting.

Similar "land mines" can exist within a commercial real estate deal. Although bodily injury may be avoided, the fall out created is nonetheless painful. Its important to recognize where these land mines might be hiding.

So, let's discuss the most common land mines you will encounter when buying or selling a building.

Environmental. Generally, buying a building includes borrowing money. An environmental assessment will be a part of your loan approval. Unseen, but lurking under the soli may be environmental contamination. An examination of current and previous uses of the building along with a review of local and regional conditions is undertaken to determine if any sub surface testing is recommended. If there is cause for concern, soil borings are collected, tested and a course of action pursued. Based upon the findings, your deal may be delayed or completely derailed. 

Entity status. Typically, ownership of commercial real estate is vested in an entity other than an individual. Most common among ownership entities is the limited liability company, or LLC. In order for the LLC to conduct business - i.e. sell real estate - the entity must be active in the state in which the entity operates. All tax returns must be current, and taxes - if any - paid. The entity must pay its annual filing fees. And, a statement of information must be on record with the state. If any of these boxes are unchecked, the entity may be suspended. A laborious process to revive the LLC must be undertaken. Searching in Corporation Wiki or the Secretary of State should tell you the status of your entity. 

Loan re-conveyance. When a loan is paid in full, a re-conveyance is necessary. Otherwise, the loan balance will still be recorded against the property. Owners incorrectly assume once the loan is paid, they are done. Wrong. Re-conveyances are easy to accomplish at the time the loan is satisfied. Not so easy if attempted years later. 

Clouds on Title. Mechanics liens, tax liens, Lis pendens - nasty little critters that prevent a seller from deeding property. Frequently, sellers of commercial real estate are clueless about matters affecting the title of their property. Before considering selling a building, its best to order a preliminary title report and have your title officer review it with you. 

Insurance. Your purchase will require insurance. Get your insurance professionals working on binding a policy early in your escrow. If you wait until you're at the closing table, the process will screech to a halt until this condition is fulfilled. 

Tuesday, May 9, 2017

An UNREALISTIC Seller - Now What? TUESDAY Traffic Tips

We've all had them. I've one now. So what should you do? Not take the assignment? Try to convince him his asking price is ridiculous? Today, I discuss unrealistic sellers and a way to get them to see the light. This and much more on this week's VIDEO tip for commercial real estate professionals.

An UNREALISTIC Seller - Now What? TUESDAY Traffic Tips

Tuesday, May 2, 2017

Use THIS to Solve ALL the Deal's Problems. TUESDAY Traffic Tips

Very early in my career I received some advice from one of my mentors, Paul Earnhart. The advice went something like this - solve all the deal problems or you won't get paid. So how do we know just how far to go in solving a deal's issues? I discuss this and much more in this weeks VIDEO TIP for commercial real estate professionals.

Use THIS to Solve ALL the Deal's Problems. TUESDAY Traffic Tips